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TMG/Merlin Update...
In case anyone is still monitoring this board, I thought I would provide an update on where TMG is and how we are doing. Many iHubbers are current or former subscribers, so hopefully some of this will be of interest.
TMG today is very different from what we started with when we went live in October 2006, but even so, the live experience has been an eye-opening and at times humbling and sobering experience. It isn't so much that the market is always "right", but it is what it is, and any system that endeavors to follow it must be able to handle the normal statistically conforming moves as well as to limit the damage from those that are driven by the random world geopolitical event or surprise economic development.
Previously, we were relying on the frequency of the signal change to get us out of a losing trade, which the backtesting said was a viable strategy in that the system always recovered and went on to new highs, but as the market demonstrated to us so painfully (like Jan this year), at times that will not be sufficient to get out of a losing trade before unacceptable losses are sustained. The incorporation of a comprehensive, adaptive Stop strategy (Loss and Profit) not only effectively mitigated the January losses, but showed us clearly that not only does it preserve capital, but it also adds significantly (~ 38% since Jan 2003) to the bottom line. In especially volatile markets, tighter Profit Stops in particular help by locking in gains before the market can take them away from you.
Also, most recently, we have incorporated an adaptation of Scamman's R3 rule. Some of you may be familiar with Scamman's work on Clearstation, which basically says that very frequently, market sell offs are preceded by spikes in the Put/Call volume ratios of various indices.
Thirdly, several members reported that there had been some theories put forth by noted market experts that with the elimination of the Uptick Rule last July, the market was exhibiting trading behaviors that had not been seen before, and that was perhaps at least partially responsible for the floundering of many TA/Quant based systems. Our own analysis also confirmed that to be true, similiar to the shift in the market behavior that led to the phenomenal volatility in 2000-2002, and that retargeting the algorithm optimization from July 2007 forward might yield better results, which in fact turned out to be true. However, we will be the first to point out that backtested results are just that, and depending on the extent of the random volatility component of the market's behavior, live results will likely be less. Even though the backtested signal has a day-to-day accuracy of ~80%, in periods of high volatility when the market is reversing daily (or even more frequently), the success rate may drop temporarily below 50%. The Stops help considerably to mitigate these effects, but the only strategy that can protect one's capital completely during these periods of high volatility (as can be defined and quantified by monitoring the VIX/VXN), is just to go to Cash and wait for saner times to return. One very successful Merlin trader just goes to Cash when an RSI of the equity curve drops below his comfort level.
In conclusion, due to these and other improvements over the last year or so, the current TMG/Merlin system is substantially and significantly different from what was being shown on the old "TMG" chart on C2, and beginning in April, TMG trades are now being entered as the "TMG II" system.
BTW, Merlin has been Short since the open yesterday, and at the moment, the equity curve is 22.48% above its 30 day minimum.
Mostly keeping my head down and taking care of "b'niss" at TMG, where the market continues to teach and we continue to learn (or relearn) important lessons. Nov and Dec were stellar, but Jan was an absolute train wreck. I think our most significant revelation has been that you can't just rely on your system being right > 50% of the time to keep you out of trouble, but also to limit the damage in those streaky times when the market goes against you for several days in a row. Formerly we were relying on the frequency of the signal changes to get us out of a losing trade before the damage was too great, but we now have a comprehensive adaptive Stop (Loss and Profit) strategy in place and that has helped to stabilize the equity curve immensely and *would have* mitigated the Jan meltdown nicely. Moreover, in high volatility conditions, the relatively tight Profit Stops in particular let you keep more of your gains before the market can take them away from you. Also, the inclusion of an adpatation of Scamman's R3 rule has provided additional insurance against the surprise selloffs orchestrated by the Boys. Only time will tell if the benefits will carry forward or if the market will throw us yet another curve, but we are currently ~ 22% above our 30 day minimum, and so we are hopeful.
Thanks for the kind words and good luck for your continued success.
Well, of course it depends on how you define Bull and Bear conditions, and what time frame you are talking about, but as we define the B/B IT in Merlin, it is the 9/60 EMA crossover. Also, the effect is much more pronounced (~ 3 times more) in the Slow mode, i.e. when the 9 EMA < 60 EMA (of price). We are somewhat suspicious of the numbers since we only have SPY/SPX/DJX/CME SP500 data back to 7/2/07, but ~18% improvement in less than a year is nothing to sneeze at.
Hey, Poker, I trust you have been making some good coin in this surly Bear market. Bought your mega-yacht yet?
Steve, as a fellow system developer you may find this of interest or perhaps useful. As you may know, in Merlin, we use a 9/60 EMA crossover to determine our IT Bull and Bear conditions, which we call Fast and Slow. What we have found is that the R3 Rule only contributes to the Bull Fast and Bull Slow signals, which is perhaps not too surprising, since it is the *unexepected* (or planned by the Boys) sell off that it portends to foretell. In other words, by the time Joe Sixpack catches on and starts to buy Puts himself, it is too late.
We only have the data that goes back to July 2007, but since then, the R3 Rule (as we have it implemented) has added ~ 18% to Merlin's equity curve. Good stuff...
Reposted from the Members Only TMG Board...
One explanation about what might be wrong with backtested TA systems...
“Last night I was reading a bi-weekly newsletter written by Tom McClellan, a well known and respect technician, and something he discussed smacked me square in the forehead. This is something I should have been thinking about over the past 6 months.
On July 5, 2007 the SEC eliminated the Uptick Rule. The rule stated that you could not sell a stock short unless and until there had been an upward change in price, an uptick, which would keep the sellers from driving the stock down simply by shorting it. That rule had been in effect since 1934, and was intended to help prevent some of the kinds of dislocations that occurred in the crash of 1929.
Subsequent to July 5, 2007, we have had a very different stock market than the one seen during the entire look-back period of my studies, dating back to 1993. For example, from 1993 through July 5, 2007, there were 11 "rare one-day buy signals," which pop up on my screen when the market internals wash out to an extreme. That's less than one washout day per year. But since July 5, 2007 there have been 10 more of those rare one-day washout sessions. That's a rate of almost 20 per year, more than 20 times the rate during the prior 14 years.
I have been aware that the efficacy of the System's signals had deteriorated since last July, which is why we have been less active in trading the System's signals. But this new, if tardy, recognition of the Uptick Rule is terrifically important. It means that there is reason to expect that the change in the market since July will be ongoing, and that, unless the Uptick Rule is re-established, we can expect the market NOT to revert to its former behavior.
Re-establishing more positive trading performance will now likely require re-vamping our methodologies with an eye toward understanding how the market is likely to behave in the absence of the Uptick Rule.” - Credits to the author, Unknown
My take is that in the absence of the Uptick Rule, the bears' short orders can go through unimpeded, which means that when a stock or ETF has reached whatever level they think is high enough, they can Short at will, and unless there is unusually heavy Short covering going on by them taking their profits if a true rally seems to be materializing, that can quickly overcome any upward momentum by the Long buyers, and also that if they are looking to Short a stock, they don't have to wait for the rollover when the buyers diminish and/or start taking profits to jump in with both feet.
In view of this, I guess TMG isn't the only TA-based system that is having its problems. It always seems like a no-brainer in hindsight, but intial testing of TMG with tighter Stops and lower OB and OS thresholds (since the absence of the Uptick Rule favors the Bears) shows some significant improvements since last July.
Jim, I don't believe it is so much that the algorithm fails or "implodes", but that at times, such as we have seen since ~ mid-Jan, the market becomes so sensitized that the least little bit of news, good or bad, can make it react so erratically and unpredictably that any sort of effort to divine its movement is no better than a coin flip. In other words, an event driven market is no more predictable that the events themselves, or how the market will react to them. The situation can even be made worse if you have a good following system that is "right" statistically based on yesterday's data, and then if the market is driven the other direction by Bennie passing wind loudly or some other spurious event, and that repeats itself for several days in a row, you can quickly rack up a string of wrong signals (your signals may be precisely "right", just one day behind) that can put a serious dent in any equity curve, especially if you are trading full positions at 100% margin or more. There will be times, of course, that market forces will still prevail, i.e. the snap back rally last week, but even those can be torpedoed with more bad news. If you are a permabear and never expect anything but bad news, you are golden, but the ones I know were wrong for a *long* time before the market finally caught up with their perpetual prophecies of gloom and doom. The only safe thing to do in these conditions is to reduce significantly position size and/or stay in Cash.
Hmmm, maybe, but we do have a "40 Long" double bottom on the 15 min chart, i.e. the chart looks like a pair of "40 longs" (a popular bra size for more mature women).
We did start trading QQQQ at 96% margin in Oct, but otherwise the signal itself is the same as before.
JLS, I think you may be on to something. It has been my experience that unless a woman is trying to get you to spend your money on her or marry her, her true interest in sex is normally limited to about once a month, if even then. And, if males are "happy" after a good booty call, then perhaps the market surges on the general feeling of satisfaction and euphoria (related to the release of endorphins) that accompanies sex. Of course, without some sort of synchronizing mechanism, different men would be happy at different times. But wait, hasn't the lunar cycle of 28 days been a sychronizing infuence of such things all through the ages??? Something to think about...
Okay, fine, but how do you know when the high price is reached? I think this is mostly an artifact of the choppy market we had through about Oct, i.e. take any position, and if you wait long enough for it to become profitable and then sell, then you come out okay. This would not be a good strategy in a market with a sustained advance or decline.
How can both be profitable in the same time frame if they are the inverse of each other???
Not a thing, just patience and discipline, to allow the statistics to revert to the mean...
Well, it is a widely known fact that 90% of equity option traders lose money, so when they are convinced there will be a New Year's rally, and indicate so by heavily buying calls, it is a good bet that it isn't going to happen, at least in the time frame they expect. IPC, which measures *index* p/c volume, is a better gauge of the Boys' (i.e. the professional/institutional money managers) sentiment, was not outside its normal trading bounds.
Nice bull trap and collapse there at the end...
The dumb money is buying equity calls today. EPC of .58 as of 1500.
IPC still very low this AM at .64 (the 30 SMA is ~ 1.6).
Actually, that would be Log Regression (exponential) Best Fit (i.e. y=b*m^x)...
There is some strong empirical evidence, not unlike the propensity for Fibonnaci ratios to act as support and resistance, that there is a positive correlation in heavy volume in index calls and puts prior to short term market advances and declines, while there is an inverse correlation with equity only calls and puts.
No, on 11/08, the smart money was hedging with puts, in the same volume as it appears to be hedging in calls now, if the volume numbers being reported are in fact correct.
A lot of people don't consider the stones that it must have taken to sign your name to that document. If the British had won the Revolutionary War, the signers would all have been hunted down as traitors and hanged (or worse).
Poker, you are correct, the Nasdaq equity only p/c (dumb money) was not outside its normal range, but the Nasdaq index p/c (smart money) was about 1/3 of its normal value. The actual number of index calls traded (2,473,866) was over twice the normal daily high, and on a par with the number of index puts traded on 11/8, a large number of which were traded early and which preceded a two day, ~ 135 drop in the NDX. Wonder what the p/c was on the other indices (i.e. the NYSE and the SP500)?
Index options are considered to be the "smart" money, while individual stock (equity) options, are the "dumb" money. Unusually high index put or call volume normally says that the large institutional investors, who make up about 50% of the market volume, are placing their bets on the movement of the underlying instrument for the next several trading days. Moreover, if they then trade the underlying instrument in the direction of their option, it can become self-fulfilling. The following link discusses this well-known effect...
http://www.investopedia.com/articles/optioninvestor/02/052102.asp
Of interest, there were about 3 times the normal number of index (QQQQ) calls traded today.
Nofluff, thanks. That site was down for quite awhile, but it is good to see it back up again. One other thing to remember, however, is that sometimes the MMs will hedge their positions with other instruments, so the MP may not be precise, especially when there is not a huge difference in the open interest over a tight range of strike prices. Also, there are times that market just ignores MP completely, i.e. it is just one more indicator that might have some positive correlation to future market moves.
Also, the IPC is currenly .65, which is about 1/3 of its normal daily value, which says the MMs are buying index calls at an unusually high rate, which normally indicates they think the market is going up for a few days. In addition, VIX has fallen dramatically the last couple of days. Fear? What is that??? This market has the attention span of a two-year old.
Poker, with the impressive recovery off the Tue low, the party may be over here in the Den for a bit. The bulls have been emboldened by a handful of good late year earnings reports, and the MMs will be worrying about EOM/EOQ/EOY window dressing for the remaining 5 trading days. With still decent consumer spending numbers being reported, talk of recession is being poo-pooed.
I think the market will eventually figure out that this morning's Fed action is not a panacea, and may be beginning to even as I type (i.e. we are trading below the manipulated futures open), but the market liquidity junkies got their fix, albeit a day late, so for the moment, it's all good.
Now you see why I say this is a managed market? I think you are right in that whatever they do, gravity will eventually prevail, but you can't deny the fact that in the short term, which is the realm of traders, they can and do have a huge impact.
Well, you know what my feelings are about waves (i.e. I don't believe in predestination), but after such a drop, we could see a bit of a bounce, just based on the fact that our permabull friends will see this as a golden buying opportunity, especially given the season, and they could very well erase a good part of the gains that many enjoyed today by being Short (if you had the stones). Also note that so far the market has only given back the gains from last Wed!!! I believe the longer term pressure is still down, but absent outside events like this Fed "disappointment", the market will continue to behave in accordance with its statistical price and breadth-based norms, which means that there will be both Long and Short opportunities for the astute TA student. Since the focus on this board always seems to be on calling the next move, I will only submit that the correct call is not always down.
Now ***that*** was an Acapulco of Acapulcos...
So, in 10 min we are back to last Thu's midday level. I guess the market is doing the equivalent of throwing a tantrum. Waaa, waaa, waaa...
Poker, it may very well be the issue of giving the market what it thinks it wants, but then with morning after regrets. However, my fear is that the playing field is not at all level, and we are very much in a managed market. It seems there is no consequence or accountability for bad financial decisions because the Government and/or the Fed will be there to provide the bailout at taxpayer expense. So, we have a Fed that caves to the threat of a market tantrum if it doesn't get what it wants, and a Government that will provide cover for those who got in over their heads chasing unrealistic and unsustainable real estate prices. The other thing is that as much as has been written about it and everyone and their brother has whined about it, the mortgage problems are a relatively small percentage of the overall mortgage base and are mostly contained within just a few regions. For larger political goals (i.e. to maintain the status quo), those in power will do anything and everything to prevent a recession or at the minimum lessen the impact and severity. And, as long at the consumer keeps spending, and investors believe in all the hype, this market won't go down appreciably, although if it doesn't, I am sure there is some extension of the current count that will explain it.
Notice: Beginning October 16th, 2007 this system which is described below will begin using full margin, 4% of QQQQ price stops and may include cash positions at times. Everything else below in the description still applies.
TMG is an Excel-based quantitative analysis trading program that utilizes a proprietary rule weighted algorithm consisting of numerous price-based and breadth-based technical indicators to generate a daily signal for trading the Powershares QQQ ETF (Symbol: QQQQ, formerly Nasdaq 100 Trust) and related derivatives. The system backtesting maximizes the historical and statistical correlation to Truth for optimal performance for a once daily EOD signal/NDO trade against the NDX since Jan 2000. Signal length varies from one to several days, and over the backtest period, there have been 854 round trip trades, so commission costs, while not reflected in the above numbers, should not be excessive. Algorithm enhancements are made periodically as a part of an ongoing continuous process improvement program. System returns are characterized by normal statistical variations over the backtest period and therefore going forward are non-deterministic. Subscribing to TMG and trading the signal is not a short term, get-rich-quick strategy, and it is only over time that the historical statistical results should be realized. When the next day's market direction is affected by emergent economic announcements and world geopolitical events, the odds of a False signal are greatly increased, since those events frequently cause the market to react in a way that is counter its normal statistical indicators. What this means to a potential subscriber is that over any arbitrary time frame that you might choose (e.g. the period of your membership), returns may be greater or less than the statistical norms. To avoid unrealistic or unrealized expectations, every prospective subscriber should carefully consider whether or not they possess the patience and discipline to stick with the system through flat-to-down periods that the historical statistics virtually guarantee will occur. To illustrate, if a fair coin is flipped 100 times, how many times could one expect to get four heads or four tails in a row? The first flip in a sequence can be a head or a tail, but the remaining 3 flips would need to match the first flip. Therefore the probability of getting four heads or four tails in a row would be 1x(.5^3)=.125, and the streak could happen anywhere from the first four flips to the last four (1,2,3,4 up to 97,98,99,100), which would be 97 opportunities. Accordingly, the expected value would be the probability of a single occurrence multiplied by the number of opportunities, or ~ 12.3 such occurrences (i.e. 4 heads or tails in a row) in 100 flips. If you limit the outcome to only heads or only tails, then the expected value drops to ~ 6, i.e. (.5^4)x97=6.1. Based on the backtesting, the single day win probability is ~ .7389, and therefore the loss probability is ~ .2611, which says that you could expect a losing streak of 4 or more ~ every 174 days of trading, and depending on the market volatility, 4 or 5 incorrect signals in a row can result in drawdowns in the equity curve that may be significantly more than any single trade stop loss, since the losses would be cumulative.
The equity curve shown reflects the benefit of several improvements that have been made in the algorithm over the past year since going live. In stating the system performance, we believe it is more important to focus on the backtested returns of the current version, since we feel that those should be more representative of performance going forward. The downturns we have experienced (and learned from) have been primarily the result of periods of extreme short term volatility characterized by successive daily or more frequent market reversals that have followed major disturbances in the market, and for which a once-a-day signal/trade system is not well-matched. Even though similar periods have occurred previously in the backtest and the backtesting showed that the system eventually recovered, there appears to be little or no tolerance by many subscribers for trading through them in real time with real money, so if you are not prepared to deal with those, you should save yourself the trouble of subscribing. In almost eight years of backtesting, there have been 2 instances of 5 incorrect signals in a row, while there have been 115 instances of 5 or more correct signals in a row, including 1 correct string of 23. By logical extension of the Nyquist/Shannon Sampling Theorem, one must sample (and be willing to trade if necessary) at twice the highest frequency of the market reversals in order to capture them accurately, which of course is simply not possible with a once-a-day signal/trade approach. Going forward, when these periods of high volatility are detected, the signal will still be published, but a recommendation will be made to go to Cash until the extreme short term volatility has moderated.
In spite of the charges and accusations of a few disgruntled subscribers who apparently do not understand the statistical realities of trading a quantitative model and only demand that the system performance match the backtested returns over any arbitrary time frame of their choosing, the numbers we have published relative to backtested returns are absolutely true and accurate. Moreover, we are willing to make a backtested trades file available to anyone who requests it in advance of their signing up so that they may verify the numbers for themselves.
Long, Short, Long, Short, based on what the market seems to be saying. Problem is, the market doesn't always follow its own advice...
Don't forget EOM and approaching EOQ/EOY effects. The last shot of 401k $$$ will hit the market early next week, and that may provide an underlying bid for at least a couple of days. Also, I would not expect much more than daily manipulations by the Boys trying to squeeze out a bigger Christmas bonus in advance of the Fed announcement on 12/11.
From the Borg, "Resistance is futile". When Bennie signals the Bulls he still has their backs, the run is on. Analysis only works on markets that are free from this sort of continued meddling.
FWIW, we just bought a new Dell as a dedicated host platform for our trading program and it *sucks*...
The Sloshing Report is basically what the Fed used to report directly as M3, until they ceased doing that to try to hide their tracks from the less savvy public. Marty may use other measures as well.